Commentary on Economics, Information and Human Action

Another economic illiteracy alert, this one from Larry Summers, Ph.D.

What horrific events in Japan. I was very sorry to awaken to hear of such devastation, and the videos I’ve seen and the fact that the aftershocks and waves have been almost continuous for the past 12 hours sound completely terrifying.

The natural disaster of a tsunami could actually provide a temporary boost to the global economy.

Larry Summers, former director of President Obama’s economic council and a former head of the World Bank, said rebuilding could temporarily boost the Japanese economy.

Summers suggested this in an interview Friday on CNBC. He added that the global economy is more resilient than most people think.

In Hawaii, disruptive weather events are good for some businesses but bad for others.

Stores that sell generators and hardware supplies experience a run on these items when a tsunami or bad weather approach; other retailers find their usual sales interrupted as people focus on evacuating and stockpiling essential supplies instead of their usual shopping.

This time it’s a “credentialed” economist who has been involved in policymaking for much of the past two decades. Larry Summers should be embarrassed to argue that the destruction of real resources can provide economic benefit, even temporarily. Even my intro macro students, who are studying for next week’s final exam, could tell Dr. Summers that the earthquake and tsunami are a negative productivity shock, shifting the long-run Solow growth curve to the left, and that any rebuilding consumption and investment will shift the aggregate demand curve out in the short run … but those resources have been destroyed and the lives of people have been devastated. That’s irreversible, although I hope that new productive activity in Japan leads to the kind of new knowledge and innovation that will shift that long-run growth potential back outward.

I think this is a testament to the fact that too many economists as well as financiers, bankers, and corporate directors often equate the short and long-term. They often forget issues of sustainable growth in favor of immediate profits. Such a philosophy is hardly economics at all. Rather, it simply places the expediency of reward ahead of stability. This is nothing less than reckless thinking and has lead us to where we now stand.

Government economists have their heads buried in the short-term reports of “economic activity”. Their political masters want to point to things happening. So, they see the little people scurrying around after a disaster, notice the increased activity, and say “this may be a good thing”.

The crime is to say that the “global economy” will be helped temporarily. Measured economic activity may indeed go up. The capital loss and disruption is much worse, but unmeasured until later.

It is the definition of short-term thinking.

I think of this every time the government claims to “create jobs” by spending more tax receipts. They measure only the effect of handing out the money, not the losses and disruption from collecting that money, or promising to collect it in the future.

Politicians are usually elected for short period of time so they obviously don’t think very much in advance. Global economy might be hit by several fraud cases and the market can turn down quite easily. This unpleasant occurrence on Japanese Islands may have a significant impact on economic situation in many countries. To think this can be a beginning of something new is a positive way how to understand this.